How Does Global Warming Affect Insurance?

Whether you think global warming is a problem or not, the fact is that it does exist, and it’s starting to have a serious effect on the insurance industry. A new study by Swiss Re estimates that the total natural-catastrophe insurance losses topped $219 billion. Even more alarming? That’s just the cost of two years: 2017 and 2018. What exactly does that mean for insurers? It means that change is coming.

This particular Swiss Re report focuses on what they call “secondary perils.” Secondary perils can either refer to small to midsize events like river floods or wildfires, or after effects of major disasters like fires following an earthquake. According to Swiss Re, secondary perils are not getting the attention they should from most insurers.

Hurricane Florence is another prime example of the growing danger that secondary perils present. The hurricane itself causes massive amounts of damage, but the subsequent floods were devastating in their own right. That flooding ended up costing insurers $28.5 billion, in addition to the $18.5 billion of uninsured damage.

What makes those two examples so powerful is that they were both compounded by climate change. As Popular Mechanics points out, one of the reasons the California Camp Fire spread so quickly was the dried up vegetation. Hurricane Florence flooding was aided by rising sea levels.

Insurer neglect aside, secondary perils are becoming larger and more frequent. The California Camp Fire is the most obvious example of this. It was a secondary peril that turned into the single largest insurance event of the year, racking up damages in excess of $12 billion.

“Large losses from secondary perils are occurring more regularly”, says Edouard Schmid, Swiss Re’s Group Chief Underwriting Officer in a statement. “This is a trend the insurance industry must act on so that we can continue to underwrite catastrophe business sustainably.”

The truth is that climate change is causing natural disasters to become more frequent, and more powerful. That’s bad news for the insurance industry, but it doesn’t have to be. The Swiss Re report points out that insurers have a number of options to help them adapt to these new challenges. Companies could leverage new technology, focus on insuring sustainable projects, etc.

“Global re/insurance assets amount to approximately $30 trillion,” the Swiss Re says in sigma. “Even a small part of this could unlock a significant amount of capital for deployment into long-term resilience-building infrastructure projects.”

The environment is changing, and so to must the insurance industry.


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